In its latest debt exchange offer, Stora Enso managed to reduce its reporting burden. Edward Russell-Walling reports.

Liability management may not be driving quite as many capital market transactions as it did a couple of years ago, but it certainly has not gone away and techniques continue to evolve. In a new twist to the traditional exchange offer, Stora Enso managed to reduce its US reporting burden at the same time as extending its debt maturity profile.

The Finland-based company is the world’s largest producer of paper and board. That has been a mixed blessing of late because the sector as a whole has been passing through a difficult phase.

Faded profits

Densely-forested Scandinavia is home to the leading pulp and paper companies, whose profits are way below the levels they were achieving at the turn of the century. A bout of consolidation in the late 1990s was expected to produce bigger companies, better able to manage investment and prices. Instead, it led to overcapacity, overproduction and weaker European prices, notably in newsprint and magazine paper. European prices now lag behind those in North America, having fallen 20% from their peak in 2001.

The result has been poor profitability, aggravated by rising energy prices. In the case of Stora, the result of a Finnish-Swedish merger, the situation was exacerbated by last year’s seven-week strike in Finland. It was against that backdrop that the company came to market in April with an offer to exchange its $750m in 7.375% notes, maturing in 2011, for new 10-year paper due in 2016.

Liquidity concerns

“We needed to extend our maturity profile and this seemed a good way to do it,” explains Peter Nordquist, Stora’s London-based vice-president, funding. “We also had concerns that the 2011 issue – our only transaction in the US dollar market – was becoming increasingly illiquid.

“We had put a lot of effort into creating name recognition in the US, but we hadn’t been in that market since 2001 and seemed to be fading away from investors’ attention.”

The pricing of the 2011 notes in the secondary market was stuck at relatively high levels – a product of the issue’s illiquidity. “That made the mechanics of the exchange attractive, even with the spread involved in buying in the bonds at a reasonable level,” Mr Nordquist says.

“It gave investors the opportunity to get into a more liquid instrument, trading more in line with the rest of our outstanding debt.”

He emphasises, however, that the deal’s most important driver was the desire to push out the maturity of outstanding debt. The company has about €6bn outstanding, about €500m of which is short-term commercial paper. As the commercial paper is a cheap source of funding, an exchange seemed preferable to paying it down.

Maturity profile

Stora had carried out a similar debt exchange offer in the euro market during 2004, with an existing €850m issue. “That proved to be a cost-efficient way of prolonging our maturity profile,” he notes.

After an extensive roadshow, Stora offered investors in the 2011 issue the opportunity to exchange their bonds for the new 10-year paper, priced at US Treasuries plus 153 basis points (bp) – later tightened to 150bp, with a coupon of 6.404%). While the old notes were Securities and Exchange Commission-registered, the new notes were Rule 144a eligible, the first such regulatory exchange and one that reduces the issuer’s Sarbanes-Oxley reporting requirements.

Merrill Lynch and Morgan Stanley were joint lead managers on a transaction that offered additional, fungible 10-year 2016 notes to new investors. A 38% success rate on the old notes combined with sales of more than $200m in additional notes to create a $507m 10-year bond.

The company and its advisers went one step further and simultaneously ran a bookrunning exercise to sell $300m in new 30-year bonds – its longest-dated debt offering so far. These were priced at US Treasuries plus 220bp, paying a coupon of 7.25%.

Improved results

Investors will have been heartened by Stora’s improved results for the first quarter, as a profit-enhancement programme starts to kick in. Cost reductions are beginning to bear fruit and the company has promised to shut down some capacity and dispose of certain assets.

“We are focusing very much on profitability and improving the cost side of the equation,” Mr Nordquist says, adding that Stora is not planning to return to the capital markets in the near future. “We’ll have no real funding needs for the rest of this year or the beginning of the next. This transaction was not prompted by funding needs as such but by a need for liability management.”


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